Sunday, March 12, 2006

A very elaborate way to scam credit card companies

A number of personal-finance bloggers like to play arbitrage with
zero-percent balance transfer offers
from credit-card companies. The basic idea: Credit card lenders are strafing people with offers for limited-time 0% APRs on balance transfers. You accept, take out the biggest balance transfer you can get (generally something in the $5,000-$20,000) range, and tell the lender to transfer the balance from another card where you're not actually carrying a balance. That creates a massive credit on the second card. You call that second lender, tell them to cut you a check for the refund, and take that money and park it in a high-interest savings or money-market account like ING Direct's (current promotional rate: 4.75% APY). You set up automatic payments to zap over monthly minimums to the card with the massive balance. When the 0% APR expires, you pay it off. Meanwhile, you've gained several hundred dollars risk free from the interest you've earned.

I think it's a silly game to play. There are practical considerations. tracked what doing this did to his FICO score over the course of a year -- since you're running up huge liabilities, FICO freaks out. (His score bounced around between a 612 and a 751). If you're late with a payment, your 0% APR disappears. If you use the card with the balance for anything else, you start owing finance charges: When you have a low-rate balance transfer on a card, and then use it for a new purchase, that new purchase becomes the very last thing that your repayment dollars are applied to.

Still, in the right circumstances, you can pull this trick off and make money with it. I still think it's pretty silly. likes to muck around with this. In "The Value of A Great Balance Transfer Deal," he breaks down the math behind one of them: an $11,000 balance transfer from Citibank at 1.9% APR will net him $600 after tax over three years. This game strikes me as a hell of a lot of work for $200 a year. The only reason I can see for doing that is that you're a finance geek and enjoy the work. Which is a perfectly fine hobby, but there must be more lucrative investment schemes out there, if you're willing to devote that kind of time and attention to detail ...

For those who do want to fuss with extracting the very best possible rates on money socked away in savings, though, my friend Stephen pointed out an excellent resource: a Bank Deals blog. The site tracks and compares rates on money-market, CD and savings accounts ... for fun. Yow. Still, yay for financial geeks!